Bank of Canada's Poloz keeps markets guessing on July rate move

VICTORIA, British Columbia (Reuters) - The effects of U.S. tariffs and tighter mortgage rules will “figure prominently” in the Bank of Canada’s interest rate decision in July but central bank Governor Stephen Poloz kept markets guessing on Wednesday on whether it would be a hike or a hold.

FILE PHOTO: Governor of the Bank of Canada Stephen Poloz speaks to delegates during the G7 Finance Ministers and Central Bank Governors meeting in Whistler, British Columbia, Canada, May 31, 2018. REUTERS/Ben Nelms

With a dovish speech and a hawkish news conference, Poloz whipsawed the Canadian dollar to a one-year low before it recovered ground as he kept the door open for the central bank to raise interest rates on July 11.

The brewing trade war between Canada and the United States is weighing on business investment but the domestic economy is near full capacity and inflation is on target, and it will be economic data that decides the next rate move, Poloz said.

“Given where the economy is we are in a situation where the economy will warrant higher interest rates. We will ensure that is a gradual process,” Poloz told a news conference after a speech on the need for increased transparency at the bank.

“Having the occasional data point that didn’t fit market expectations is not the sort of thing that throws that entire narrative off course. We are data dependent, not headline dependent,” he added.

The Canadian dollar weakened to its lowest level in more than a year at C$1.3385 to the U.S. dollar, or 74.71 U.S. cents, after Poloz’s speech, before regaining all of the lost ground after he promised gradual hikes during a news conference. Financial markets’ expectations for a rate hike in July ended up largely unchanged at about 55 percent.

“For now, we’ll stick with our call for a July hike,” Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, wrote in a note to clients. “... we’ll be watching the data very closely over the next two weeks.”

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Poloz said there was a litany of uncertainty to consider, including how trade worries are holding back business investment, how tighter mortgage rules have affected Canada’s cooling housing market, and how highly indebted consumers are responding to rising interest rates.

While Poloz said policymakers are not going to make monetary policy decisions based on “wiggles” in economic data, his focus on incoming data means the bank’s Business Outlook Survey, due out on Friday, and reports on GDP and employment due to be released before the rate decision will be scrutinized.

The bank has raised rates three times since July 2017.

Additional reporting by Andrea Hopkins, David Ljunggren and Dale Smith in Ottawa and Fergal Smith, Matt Scuffham and Danya Hajjaji in Toronto, editing by G Crosse and Diane Craft